Pay rise or not – should MPs’ pensions be more like the public’s?

11th July 2013

As part of the proposed increase in salary, MPs’ pensions will get less generous but are the changes enough asks Mindful Money editor John Lappin.

Will MPs dare to give themselves a pay rise in this economic climate? Well, despite incurring the wrath of just about everyone except perhaps investment bankers (who face a little bit of heat on the pay issue themselves) they just might. Of course, technically it is out of their hands.

As the Herald reports today, the Independent Parliamentary Standards Authority will recommend a substantial rise of around 11% to £74,000 a year from 2015 in return partly for changes to pensions and benefits. It is unclear whether the Prime Minister and other party leaders who say they oppose a rise, will intervene to prevent this. And to be fair, even many rank and file MPs are deeply unhappy with the recommendations.

But what exactly is this pensions trade off?

Well, as part of the proposal, MPs will move to a career average pension system rather than the more generous final salary one.

This means that pension benefits will accrue at 1/51 of salary per year, rather than 1/40.

It is a big change and actually a substantial reduction so should we feel a little bit sorry for the politicians? Well to receive their pension benefits, MPs will have to contribute a little bit less for their pension benefits at 9.2 per cent of salary rather than the current 13.75 per cent.

But this send a very inconsistent message. At the moment, there is a huge argument going on in the country between those who receive the mostly private sector defined contribution pension and those who receive the mostly public sector defined benefit pension.

The system actually varies between, for example, teachers and council workers and NHS employees. Some schemes have ring fenced funding or at least some ring fenced funding to back them up. Some do not. There are also different levels of contributions required depending on the role and the sector.

But when teachers saw their pensions changed at the start of this Parliament, they moved to a less generous pension settlement and they were asked to contribute more not less.

And while many will argue teachers are still getting a good deal, teachers themselves will be contrasting this with the deal oe table to MPs.

And yet, this is not the only inconsistency. The Government is in the midst of bringing in a new workplace pension reform. It will require a minimum of 4% contribution from workers, 3% from employers and 1% in relief. Bluntly 8% is just not enough and with defined contribution as Mindful Money readers surely know already – there is no guaranteed amount – it is what you build up plus investment returns. Then you have to find ways to turn it into an income often meaning you are at the mercy of what you can secure as an annuity unless you have a big enough pot of money for draw down.

So in the next few years, we are going to hear politicians make the case to the general public (remember them MPs) that they should be contributing more to their workplace and mostly DC pensions when they will be contributing less and to a DB scheme.

So here is a wild suggestion, which handily comes about as MPs finalise their thinking on the latest pensions bill.

They should move to a defined contribution system with a public contribution at the level of say a good employer might put in, MPs can then decide how much above 4% they want to put in, and the resulting pension would depend on their investment returns and indeed how well they invested their money too.

That would mean MPs were in the same pension system as the rest of the country and not in their own pensions ivory tower. And no, it shouldn’t be part of pay rise deal, well not unless everyone else in the country was getting a pay rise too.

29 thoughts on “Pay rise or not – should MPs’ pensions be more like the public’s?”

it is also a trap as each moves ties them in more and more like they are in a spiders web. For example how does this work? From the Sydney Morning Herald.

“The Bank of Japan is on track to becoming the largest shareholder on the Nikkei stock exchange as the central bank takes the bold move of stepping up its purchases of riskier assets to help support its fragile economy.

According to Japanese press reports, the Bank of Japan bought ¥123.6 billion ($1.27 billion) worth of exchange-traded funds (ETFs) in August, bolstering its equities portfolio to an estimated $72 billion. “

Hi Shaun
I’m not sure a ‘beggar thy neighbour’ risk is really there this time. Sometimes its the USD that looks a little stronger ( like now) but all the majors are being kept in pretty tight noose. ZIRP or NIRP is necessary for the CBs to gradually, silently ‘retire’ debt. China coming off its boom and letting commodities slip is great timing for this. All ‘currencies’ are depreciating , and if raw material prices reduce in harmony, the reduction in value for joe blogs will be kept under wraps because ‘measured’ inflation will appear moderate. Investor/speculators have nowhere to go when everywhere its the same.
Meanwhile the drift to serfdom continues. Morgan Stanley have produced a report that shows over 25% of US jobs are ‘low wage’ , closely followed by Australia, Canada, Ireland and UK, Germany not far behind. Interestingly France is less than 5%. In the meantime US net household worth has just hit a high, mainly due to real estate and stock values; held by 10% of the population.
Happy days for some as the ‘great readjustment’ continues on its merry path.

We have had quite a rally in the UK Pound £ versus the Yen though from a low of ~125 to a peak of 180 (now 178) so there are some substantial moves about. If we are looking for a faller then one which has not gained much publicity is Bitcoin which was worth US $650 in early July but now is US $410.

Speaking of serfdom Forbin’s link yesterday about Monarch Airlines and its 30% wage cuts pretty much said it all……You may also have a wry smile about the Bank of Japan apparently on its to becoming the biggest Nikkei investor!

Hi Shaun,
I got some Euros today for my trip to Switzerland and France at the weekend. the best sterling tourist rate I’ve had in a few years now. I doubt however that shall feel richer in Switzerland.
I am in agreement with the other comments that the whole circus is designed to protect the exposed incumbents (Banks & Govts), an unfortunate side effect is the magnification and polarisation of society that is a mathematical result. In that way this solution does very slowly sow the seeds of it’s own destruction.
I note that KPMG is now helping their young professionals buy houses in London, in a self-interested effort to retain workers in the capital. Who would have thought that management professionals wouldn’t be able to afford to live? Is that not another canary I hear chirping?
Paul

That is one of the oddities about Switzerland which has no inflation to speak of but such high prices! Mind you the UK Pound £ had been dropping against the Swissy for some time before the recent bounce….

The point about companies subsidising mortgages is a return to the mortgage subsidies in the financial sector of 20 years or so ago. Back then there was a subsidy on up to a 4 times mortgage but capped at £100,000. The cap seems laughable now doesn’t it? But you could buy something nice with that then…

“Agency mortgage backed securities (henceforth “MBS”) are fixed income securities that entitle the owner to principal and interest payments on underlying residential mortgages that are guaranteed by Government Sponsored Enterprises (GSEs) such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Company (Freddie Mac), or government agencies such as the Government National Mortgage Association (Ginnie Mae). The MBS market is large, with over $7.5 trillion in outstanding debt at the end of 2013 according to the Financial Accounts of the United States.”

It is an enormous amount to guarantee and of course the Federal Reserve entered the game by buying some US $1.7 trillion of them.

I don’t believe interest rates CAN go to 5% in the next decade without social breakdown.
Many, many people have, because of lack of alternative, bought housing on loans which no responsible lender would have made.
They’ve been made by banks as insurance against an end of bankocracy: inveigle the public to the extent that they too become addicted to ZIRP.
Politicians can then pretend that it is for SOCIAL reasons that we retain ZIRP.

You are in tune with Bank of England Governor Mark Carney who gave a speech including this bit this afternoon.

“Over the medium term, several dynamics are likely to keep rates lower than in the past. UK rates could be restrained by continued imbalances between global saving and investment, together with potentially lower rates of global productivity growth. Central banks can also be expected to accommodate with lower risk-free rates the higher spreads that are likely to result from new regulatory requirements.

All of these factors likely mean that, even when spare capacity is used up, Bank Rate will need to be materially lower than in the past in order to keep the economy operating at its potential and inflation at its target.”

Hi Shaun,
I think Carney means the long term since we are already over the medium term. The total mismatch of mortgage rates, savings rates, credit card rates etc, etc, will become a permanent (not “temporary”) feature – i.e. huge spreads. That means savers, pensioners need to find a new strategy; and that’s easier said than done. These guys have effectively destroyed the savings culture and that’s bad.

Ramp up the cost of BTL mortgage rates. Ensure honest declaration of properties that are being let out. Exemption for those who are renting out their only property, whilst having to work elsewhere in the UK. Rates could be moved upward, but with some form of extra impact on BTL mortgages.

Those who have over-leveraged on their own home, SHOULD feel some pain, but they should be insulated from the worst of it. The full level of discomfort that should be felt by those that exploited lax lending, lax immigration, lax taxation to profit on a needy populace, and a rigged market.

BTL needs to be reduced immediately, and curbed/discouraged in the future.

The Kent couple who own (or have mortgages on) 1,000 BTL properties, are now looking to sell them all to a foreign company. No longer just transferring wealth from asset poor to asset rich, but also sending that money out of the UK.

It does feel as though we’re expected to hang on every rate hint and tv frown from the bank bosses. Carney – the “tantalizer” – has been at it again today. In other spheres of commerce or command I would have expected such a dangler to be have been laughed out of the room by now but I don’t think it can be too long – or too many more Telegraph headlines on the imminent rise – before he’s busted as a paper tiger. All it takes is for one MP to ask: if this recovery’s so strong, why the induced-coma interest rate?

Shaun, did you notice that Frances Coppola was speaking about the euro on Erin Ade’s show today? She covered some of the same issues that you have raised in this and previous columns. Do you think that the euro area is really ready to operate more as a federation, as she suggests?

‘exactly who would police any Bitcoin counterfeiting? However today we have news about more corruption in the world financial system as UK banks are told to prepare for around £2 billion of fines as a punishment for foreign exchange market rigging’.
It used to be a lack of trust was synonymous with used car salesmen and estate agents, now it’s politicians and bankers. It is a shame because I am sure the majority of people in any of these professions act with integrity. Sadly, the capitalist system will often by it’s nature favour the most ruthless behaviour and that’s when those with self-serving greed end up with disproportionate influence.
It’s a great idea, but you can bet your bottom bitcoin that some evil genius somewhere is going to be thinking about how to cheat the bitcoin system. Let’s hope they don’t succeed, because having the realistic choice of reliable digital currency is sure to change the banking sector for the better.

There has been a litany of central banks issuing statements knocking Bitcoin and the like, Well quelle surprise! Of course with the likely price volatility of such new instruments there are genuine issues but it does not mean that there are not also benefits.

In recent times Bitcoin would not have been the best thing to be buying your popcorn with because its price has fallen even faster.

Too True mickc; And since ZIRP continues at full speed we may conclude that the banks have not yet actually been saved.

I wonder how much longer this will go on; or to put it another way – I wonder how much trouble the banks are really in. Either way Carney continues to fob us off with all sorts of nebulous reasons for not raising the base rate.

I would argue that the mechanism you describe is one of the ways that monetary policy has turned out to be “pushing on a string”. Savers have definitely seen interest-rates fall with in the UK the Bank of England’s Funding for Lending Scheme giving them the latest push. Meanwhile as you say many borrowing rates have fallen by less than one might assume, in fact the credit card rate quoted by the Bank of England has risen.

So it turns out that the “bankocracy” theme is the one which has broken the transmission mechanism of monetary policy. Not the way the theory expected but it is rare for economic theories to have been pretty much right in these times!

Hi Shaun, Sorry, but your last sentence reminded me of the old joke about Economists being people who see something working in practice and wonder if it will work in theory. Come to think of it it probably applies to Central Bankers too. 😉

I agree and wonder if the government is simply getting revenue by another route. It is likely as you say that they will simply pass the costs onto us but there are other problems. Firstly via the Bank of England’s Funding for Lending Scheme we have been subsidising the banks, have we been fattening them up for the fines? Secondly the fines fall on the shareholders who will have had no knowledge of them and no ability to stop them. Fines (and indeed prison sentences) should be for those guilty of actually committing these crimes.

That does not stop it from sending out its missives with quite a dose of arrogance attached. There is an irony in it talking of stability when one of the biggest dangers to stability is its own policies!

The same goes for officially-issued currency. How can anyone be sure that this is worth the same as it was before continuous debasement without any Keyensian redemption – you can’t; and we know that the more any oficially-issued currency is debased and the coins have been clipped, the less it is worth against real wealth. At least Bitcoin is notionally limited in quantity so that it may not be debased, that is until someone successfully counterfeits it.